Action 8 Assure that transfer pricing outcomes are in in line with value creation Aim is to ensure that the attribution of value for tax purposes is consistent with economic activity generating that value. Timing Potential policy change Impact? 2014 Deloitte LLP. All rights reserved. BEPS 1
Actions 8 Assure that transfer pricing outcomes are in line with value creation Potential policy change 8 Intangibles The Action Plan will develop rules to prevent BEPS by moving intangibles among group members. Adopt a clear, broad definition of intangible property (IP). Ensure that profits associated with IP are allocated according to value creation. Develop rules for transfers of hard to value IP. Update guidance on cost contribution arrangements. Changes to the Transfer Pricing Guidelines and possibly to the Model Tax Convention. 2014 Deloitte LLP. All rights reserved. BEPS 2
Transfer pricing methods Two-sided transfer pricing analysis should be performed in which the alternatives of both parties are considered. The draft reiterates that depending on the facts any of the OECD transfer pricing methods may constitute the most appropriate method. Guidance on arm s length pricing when valuation is highly uncertain at the time of the transaction is subject to change in line with future OECD Base Erosion and Profit Shifting work. 2014 Deloitte LLP. All rights reserved. BEPS 3
Revised discussion draft on intangibles Revised proposed amendments to Chapter VI of the Transfer Pricing Guidelines five parts: Identifying intangibles. Ownership of intangibles and transactions involving the development, enhancement, maintenance and protection of intangibles. Transactions involving the use or transfer of intangibles. Supplemental guidance for determining arm s length conditions in cases involving intangibles. Annex: 27 Examples. 2014 Deloitte LLP. All rights reserved. BEPS 4
Changes to the definition of intangibles The 2013 discussion draft s proposed definition of an intangible asset for transfer pricing purposes: Something which is not a physical asset or a financial asset, and which is capable of being owned or controlled for use in commercial activities, and whose use or transfer would be compensated had it occurred in a transaction between independent parties in comparable circumstances. It remains important to distinguish intangibles from market conditions or circumstances that can not be owned or controlled by a single enterprise. 2014 Deloitte LLP. All rights reserved. BEPS 5
Return from exploiting intangibles Contractual relationships between related parties are a starting point for any transfer pricing analysis, BUT. Location where important functions related to intangible assets are performed is key. Compensating members of group for functions performed, assets used or contributed, and risks assumed in the development, enhancement, maintenance and protection of intangibles. Where legal owner outsources most or all important functions, its entitlement to any material return after compensating others is doubtful. Return on R&D function. 2014 Deloitte LLP. All rights reserved. BEPS 6
Important functions and intangible returns In considering the allocation of returns attributable to intangibles, certain important functions will have special significance. Important functions include: Design and control of research and development. Management and control of budgets. Control over strategic decisions regarding intangible development programmes. Important decisions regarding defence and protection of intangibles. Ongoing quality control over functions performed by independent or associated enterprises that may have a material effect on the value of the intangibles. 2014 Deloitte LLP. All rights reserved. BEPS 7
The recharacterisation question Potential for certain examples in the draft paper being seen as permitting recharacterisation of actual transaction undertaken. Recharacterisation is something rightly cautioned against in Chapter I of the Transfer Pricing Guidelines as this will lead to potential double taxation and/or mutual agreement procedure cases. Same result can be achieved without having to recharacterise a transaction? OECD considering whether there is a need for special measures application of rules outside the arms length principle. 2014 Deloitte LLP. All rights reserved. BEPS 8
Location specific factors A new section sets out the OECD s approach to certain comparability factors: Location savings. Other local market features. Assembled workforce. Multinational group synergies. The above are comparability factors that should be considered in transfer pricing analyses, but are not in themselves intangible assets: They may be valuable nonetheless. 2014 Deloitte LLP. All rights reserved. BEPS 9
Location specific factors Sharing location savings between group companies best done through comparability analysis, if the savings are not passed on to third party customers. A uniquely qualified or experienced cadre of employees may affect the arm s length price of services between related entities. Under the arm s length principle, reward for group synergies is only appropriate if there has been a deliberate concerted group action which provides a multinational group s members with material advantages. 2014 Deloitte LLP. All rights reserved. BEPS 10
Practical application Identify the legal owner. Identify parties performing functions, using assets and assuming risks related to the development, enhancement, maintenance, and protection of intangibles. Confirm consistency between related party-agreements and conduct. Identify controlled transactions. Determine an arm s length price for relevant transactions. 2014 Deloitte LLP. All rights reserved. BEPS 11
Timetable and next steps Final guidance by September 2014. New version of OECD guidelines in due course: Likely to be adopted into UK law (as for current versions). Clarification of existing principles or new guidance? 2014 Deloitte LLP. All rights reserved. BEPS 12
Work programme Action 8: Assure that transfer pricing outcomes are in line with value creation Consider whether this Action may affect your current tax strategy Quantify potential exposure Intangibles Has the group valuable IP owned by one territory that has been developed or contributed by another? Assess the adequacy of transfer pricing documentation currently in place in relation to at risk income flows. Calculate potential tax exposure if current arrangements were overturned. Consider whether alterations will be necessary to current structures and cost/time to implement. 2014 Deloitte LLP. All rights reserved. BEPS 13